Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School are the acknowledged experts on global investment returns, having compiled data covering 22 countries over more than a century. As of February 2013, the longest period of negative real returns from US equities was 16 years. But it was 19 years for global equities (and 37 for world ex-US), 22 for Britain, 51 for Japan, 55 for Germany and 66 for France. Such periods are much longer than most small investors would have the patience to wait.

I've pretty much stopped debating with friends about the merits of having a bond/cash cushion to soften a significant market pull back. They usually quote "Average S&P returns since 1926 are 10%; Aren't you enjoying this rally? and I'd rather be an owner than a lender" (Bond reference) I have the majority of my portfolio in equities but I've never forgotten the quote from William J. O'Neal, IBD, "All stocks are bad."

I think many of us have -mostly- enjoyed fantastic equity returns since the 1980s and see this as a given.

This is an excellent post. Risk tolerance is a very interesting issue. In the long bull markets, investors think they have high risk tolerance. I remember bear markets. In bear markets all of a sudden people's risk tolerance quickly changes.

This is an excellent post. Risk tolerance is a very interesting issue. In the long bull markets, investors think they have high risk tolerance. I remember bear markets. In bear markets all of a sudden people's risk tolerance quickly changes.

I agree 100%. I am amazed that people who ought to know better, and people who ought to remember the 2000-2002 and the 2008-2009 bear markets, are amazingly aggressive with their asset allocation. It goes to show that memories are short and the recency bias does exist.

This is an excellent thread! I have a question and apologies if it is answered elsewhere. If we have invested in bonds and mostly US treasury bonds to reduce risks, what is the effect if the congress does not raise the debt ceiling? Does that automatically mean the US defaults on its debt and does that affect bonds? Thank you in advance for any insight!

If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:

US or world economic, political, tax, health care and climate policies

conspiracy theories of any type

discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.

If so, wouldn't most folks tend to have a more aggressive optimistic allocation because it is arrived at from a more comfortable setting (living room, brokerage office, lazyboy recliner. . . ) than during hard economic times?

My one comment about "sleep factor" is that it is just as possible to be irrational or ignorant about sleeping well at night as it is to use that intelligently to guide investing. Surely we want to avoid getting into situations where we do stupid things due to anxiety or panic, but it is also necessary to learn enough about investing to not be so nervous and also to manage to discipline our emotions enough to stay the course when objectively the course is the right course. In Larry Swedroe's concept of "willingness" I sometimes wonder of that should not be a contract with ourselves to manage our emotions and stick to our plan.

Short version: Adjusting the allocation so conservatively that we can sleep well at night may not be the right solution to the problem where understanding our plan, ignoring noise, and controlling our emotions would be a better idea.

Short version: Adjusting the allocation so conservatively that we can sleep well at night may not be the right solution to the problem where understanding our plan, ignoring noise, and controlling our emotions would be a better idea.

This doesn't have to be about guesswork, personal fortitude, ignoring noise, etc. It's about numbers. Here, do this: Pull up your stock allocation, and imagine you just retired. The market tanks 25% one year and, oh, 16% the next. Returns are mediocre for the next decade. How does the value of your 3 or 4 percent withdrawal look over the rest of your life now that you're no longer contributing to your investments? Pick an asset allocation: 60/40 maybe. How much was it down in 2008-09?

Now do the same thing but assume a conservative porfolio that lost, say, just 5% during 2008-09. How does your withdrawal rate look then?

My spreadsheet has me breathing (and sleeping) easy over the next 30 years with the latter scenario. With the former? My standard of living plummets and stays down for the rest of my life.

Things looked pretty grim when nisiprius first posted this. Out of courisity, I went to the S&P 500 return calculator to see what the return has been since he posted this in August 2011. The S&P 500 has had an annualized return of 15.26% with dividends reinvested.

Short version: Adjusting the allocation so conservatively that we can sleep well at night may not be the right solution to the problem where understanding our plan, ignoring noise, and controlling our emotions would be a better idea.

This doesn't have to be about guesswork, personal fortitude, ignoring noise, etc. It's about numbers. Here, do this: Pull up your stock allocation, and imagine you just retired. The market tanks 25% one year and, oh, 16% the next. Returns are mediocre for the next decade. How does the value of your 3 or 4 percent withdrawal look over the rest of your life now that you're no longer contributing to your investments? Pick an asset allocation: 60/40 maybe. How much was it down in 2008-09?

Now do the same thing but assume a conservative porfolio that lost, say, just 5% during 2008-09. How does your withdrawal rate look then?

My spreadsheet has me breathing (and sleeping) easy over the next 30 years with the latter scenario. With the former? My standard of living plummets and stays down for the rest of my life.

Well, withdrawal model data show that the only really serious asset allocation mistake for retirees is to have too little in stocks. Having more than optimum in stocks does does not severely increase the chances of portfolio failure. It seems that the problem with sequence of returns is roughly offset by the higher prospective return of stocks so that it doesn't matter very much what one has as long as one has enough in stocks. What does result from having a lot in stocks is more wealth at death but with a great deal of uncertainty regarding how much that is. Sequence of return risk is exactly why people can't rely on excessively high withdrawal rates like 6%, 7%, 8% as some advisors might once have thought. But the other side of this problem is that low returning portfolios that don't have much volatility also do not allow high withdrawal rates. You can't withdraw 4% from bonds yielding 2% unless inflation is considerably less than 2%. At 1% real you can do 3.8% from TIPS for example (for 30 years) and 4.4% at 2% real.

But that was not really my point. The point is that when you have arrived at a decision for asset allocation that makes sense on financial grounds and there is a problem with whether or not you can sleep at night, one should decide if one should adopt a less than desirable asset in order to sleep at night or adopt a more correct asset allocation and learn to live with it. To repeat, none of this urges anyone to be aggressive willy nilly.

Relevant to jitters and overvaluation, what would somone do with a new lump sum at such times? I posted about windfall in prior thread that now has me at around 20% equity, rest in cash. I am hesitant to go up to my target 70% equity now. What are peoples thoughts on moving up to 50% and having rest available for next correction? I know opinions on market timing but some of the current data is pretty convincing and hard to ignore and blindly go all in!

Relevant to jitters and overvaluation, what would somone do with a new lump sum at such times? I posted about windfall in prior thread that now has me at around 20% equity, rest in cash. I am hesitant to go up to my target 70% equity now. What are peoples thoughts on moving up to 50% and having rest available for next correction? I know opinions on market timing but some of the current data is pretty convincing and hard to ignore and blindly go all in!

Assuming we don't know what will happen in the market tomorrow or any of the subsequent tomorrows, the odds are you'll come out with more portfolio value from going all in than from waiting. Odds, of course, aren't the same as certainty.

That said, if one doesn't invest at all one won't participate in any future growth.

The next correction is always approaching. We just don't know when, or how much.

If, in order to invest the remaining 50%, you need to go in slowly, or even hold some back, that's better than the alternative, and supposing you have a decades-long time horizon probably won't make much difference.

All the data you find convincing is known to all the other market participants, so you won't get the drop on them just by being aware of it. Individuals and institutions have, of course, different needs and objectives, and, importantly, different analyses and opinions.

I wrote about market mechanics toward the middle of this post. Maybe it will help you decide one way or the other.

Yes, I understand all the data is known to market participants, hence efficient markets. I am not really proposing market timing just a general consensus that market conditions suggest now may not be the best time to put it all in. If market does take a dramatic down turn, history says it could take 5-15 years to rebound fully. Isn't it wise to wait till the down turn and then go all in? I have a 15 year time frame. Options are basically:

1. All in to desire equity allocation
2. DCA slow of period of 6-12 months up to target equity allocation
3. Hold in cash and bonds until market down turn. Who knows when that would be though!

I'm sorry, rad doc, that I failed to be helpful. Let me try a different approach.

Answering for yourself, not necessarily for us (but feel free to post if you like), under what circumstances, different from today's, would you be willing to go all in?

That is to say, what conditions would cause you to feel the opposite way? With them in mind maybe you might be able to approach how likely they are.

None of us can tell you which of the three options you wrote to adopt. That's your decision and nobody else's. If you want to wait it's in your power to do so and you don't need our permission.

Capital markets are volatile. If you thought 70% equities was right, but now you're only comfortable with 50%, maybe 50 / 50 is a better answer for you than 70 / 30. If so, it's preferable to find out now rather than to find out later.

Often it turns out reluctance to buy really means the chosen asset allocation is overly aggressive. Often. Not always. Often.

By all means, you were and most here are very helpful! Good questions. I suppose to start, I would feel more comfortable if the metrics such as the CAPE, didnt suggest the market is so grossly overvalued, only higher during dot com bubble and actually at the same level as the Great Depression. Now, I agree perhaps it means my allocation percent needs to change. I had been near all equities so it is a bit of change in mentality. Perhaps 50/50 with a slow buy-in is a reasonable alternative to sitting on side lines and hoping the “right time” comes.

By all means, you were and most here are very helpful! Good questions. I suppose to start, I would feel more comfortable if the metrics such as the CAPE, didnt suggest the market is so grossly overvalued, only higher during dot com bubble and actually at the same level as the Great Depression. Now, I agree perhaps it means my allocation percent needs to change. I had been near all equities so it is a bit of change in mentality. Perhaps 50/50 with a slow buy-in is a reasonable alternative to sitting on side lines and hoping the “right time” comes.

One thing that I have frequently read in arguments about using CAPE is that recent changes in accounting practices have changed the numbers going into the calculations, making CAPE unduly pessimistic. In other words, the CAPE figures for recent years are not calculated on the same data as for previous years. It's no longer apples and apples.

I don't use CAPE or other metrics in designing my own AA. I just go with what seems to make sense in terms of fixed income : US stocks : non-US stocks. But from my highly, highly limited understanding of predictive metrics, this might be interesting to you: http://www.philosophicaleconomics.com/2013/12/shiller/

edit to add: but nearly any tactic is better than "sitting on side lines and hoping the 'right time' comes"; aka waiting for a Sign from Above. Close your eyes and jump, either all at once or bit by bit. But get in there. Remember, another definition of risk is keeping everything in under-inflation-rate cash. You lose money that way, too.

The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

VictoriaF wrote: P.S. I have missed this recent market drama because I was away with limited access to the Internet. That was very fortunate. While those with the access to the news were preparing for a cataclysm, my greatest worry was to get into the Catacombs before they have closed for the day.

Getting back out is also important!

Brad

The place if full of bones. That would have been the coolest place to spend a night, provided I got back out eventually.

Victoria

Crazy... I'm down more than I'll make this year... time to keep buying!!!

I'll answer honestly for myself - because when I'm feeling crappy I go look at my 401(k) value. In recent years, it's made me feel better. When it goes down, I don't have that cushion to fall back on when I feel like work is too stressful to keep doing, etc.

Just checked my portfolio (70/30)... as of today I am still up 1.2% since Jan 1. That's ~14% annualized. Everyone is in some sort of uproar about today, but I dont care how we got here. I'm up. Would it make a difference if Jan 3rd was up 1.2% and every day thereafter was flat? Or if we got there going up 7.2% and then down 6%? Who cares? Diversify and stay the course. It's all noise in the short term.

The past few days have been very useful for me. I was well aware of the drops in value and even logged in to check my portfolio after the value was recalculated following the largest drop. I did that on purpose to evaluate myself. Didn't cause me to even think of the sell button.

Not that I'm ready to go into a more aggressive allocation (I'm at 70% stocks, so not quite age in bonds) from this, but it was useful for me to know a single day large drop didn't cause me to think differently. That's at least hope that my 70% stocks isn't too aggressive.

"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_

This is an excellent post. Risk tolerance is a very interesting issue. In the long bull markets, investors think they have high risk tolerance. I remember bear markets. In bear markets all of a sudden people's risk tolerance quickly changes.

That's because they see their portfolio decline for the first time. Day after day, week after week and month after month of declines will build tolerance, but that doesn't get people to feel rich and spend.

The past few days have been very useful for me. I was well aware of the drops in value and even logged in to check my portfolio after the value was recalculated following the largest drop. I did that on purpose to evaluate myself. Didn't cause me to even think of the sell button.

Not that I'm ready to go into a more aggressive allocation (I'm at 70% stocks, so not quite age in bonds) from this, but it was useful for me to know a single day large drop didn't cause me to think differently. That's at least hope that my 70% stocks isn't too aggressive.

Just a question here--does anyone take Shiller PE seriously? According to Guru Focus, based on where Shiller PE is now, even after the drop, stock returns are likely to be around negative 2 to 3 percent over the next 8 years.

The past few days have been very useful for me. I was well aware of the drops in value and even logged in to check my portfolio after the value was recalculated following the largest drop. I did that on purpose to evaluate myself. Didn't cause me to even think of the sell button.

Not that I'm ready to go into a more aggressive allocation (I'm at 70% stocks, so not quite age in bonds) from this, but it was useful for me to know a single day large drop didn't cause me to think differently. That's at least hope that my 70% stocks isn't too aggressive.

Just a question here--does anyone take Shiller PE seriously? According to Guru Focus, based on where Shiller PE is now, even after the drop, stock returns are likely to be around negative 2 to 3 percent over the next 8 years.

I don't follow it one way or the other. I'm not sure if something in my comment indicated I did.

"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_

The past few days have been very useful for me. I was well aware of the drops in value and even logged in to check my portfolio after the value was recalculated following the largest drop. I did that on purpose to evaluate myself. Didn't cause me to even think of the sell button.

Not that I'm ready to go into a more aggressive allocation (I'm at 70% stocks, so not quite age in bonds) from this, but it was useful for me to know a single day large drop didn't cause me to think differently. That's at least hope that my 70% stocks isn't too aggressive.

Just a question here--does anyone take Shiller PE seriously? According to Guru Focus, based on where Shiller PE is now, even after the drop, stock returns are likely to be around negative 2 to 3 percent over the next 8 years.

I follow Robert, he makes sense. It also makes sense to not get greedy and take some profits when the market gets crazy high. That way when the next bear strikes you'll have a cash cushion to soften the blow.

I went church today and heard everything I needed to hear. I believe I’m headed in the right direction. Still am ignorant and somewhat anxious about the stock market and then I read this. A very good day. Peace be with you. Thank you

I haven't been to Bogleheads in a number of months, so I thoroughly enjoyed nisiprius' post. I guess I've lived through too many market drops to get concerned about a 10% drop, even if it is takes place in a week or so. Nisiprius' post is important because your reaction to a market correction is so much more important than any risk test that any investment firm can offer to determine your risk tolerance. The real world is the real test.

Really enjoyed the original post. Did a double take when I saw it was written in 2011! Timely indeed.

I've been a stay-the-courser for the years I've been actively investing surplus funds and recently made my portfolio even more aggressive in the last few weeks (currently 85% stocks; 15% bonds--half was already at that asset allocation, but the other half was in a lifecycle fund that I didn't realize was not as aggressive as I'd thought). But I'd be lying if I said current circumstances don't concern me. Aside from a Roth I ignored at the time, I was too young to have much in the market in 2008 and delayed investing for several years immediately after (probably to my detriment) before I found this forum. (Then again, I used the cash to buy a home outright, avoiding mortgage fees, and the peace of mind there has been priceless).

But getting back to this sense of uneasiness, what I find surprising is how some previously zealous stay-the-coursers are now deviating from that philosophy. Again, I wasn't on this forum in 2008, so perhaps a bit of that was going on then. But what do you all think about the following?

It's a post by Grizzly Mom & Dad, bloggers I found through Mr. Money Mustache. They're young and recently moved into 80% bonds! The comments associated with the article are also interesting!

"Stock market valuations are above almost anything seen in history coupled with dismal outlooks for future growth. The best description I can give of the current state of public markets today is simply: crazy and disconnected from reality."

But I'd be lying if I said current circumstances don't concern me. Aside from a Roth I ignored at the time, I was too young to have much in the market in 2008 and delayed investing for several years immediately after (probably to my detriment) before I found this forum. (Then again, I used the cash to buy a home outright, avoiding mortgage fees, and the peace of mind there has been priceless).

But getting back to this sense of uneasiness, what I find surprising is how some previously zealous stay-the-coursers are now deviating from that philosophy. Again, I wasn't on this forum in 2008, so perhaps a bit of that was going on then. But what do you all think about the following?

It's a post by Grizzly Mom & Dad, bloggers I found through Mr. Money Mustache. They're young and recently moved into 80% bonds! The comments associated with the article are also interesting!

"Stock market valuations are above almost anything seen in history coupled with dismal outlooks for future growth. The best description I can give of the current state of public markets today is simply: crazy and disconnected from reality."

I feel the same way actually. Even though I've moved back into not trying to time the market, I took a bunch of money out a year or two back on the advice of a friend who's a financial advisor. In retrospect, I wish I had stayed in through that period, but I've also been nervous about getting back in at the current prices. Having gone through the last bubble / downturn, I think I was overly emotional about it.

I'm no expert, but I am also frustrated that it seems as if the government is prioritizing trying to keep the market up (by keeping interest rates / inflation low, letting companies borrow money at very low rates for stock buybacks, etc.), but not raising interest rates, which will actually help folks who want to have ways to safely get a decent return on investments. It's also frustrating that there haven't really been too many reasonable ways to hedge.

Nisiprius
One of the best posts Have read oaths forum.It does comedown to a comfort level and it took meyer to determine that level. I am an old man and would like to have a much higher return when the market is doing well, but my tolerance level slow and I have finally settled on a an AA even though it may produce a very low return. Remarkably, all of the investment advisor I have have used including Vanguard have encouraged a high % of equities in-order to boost my return. None of them ever understood my tolerance to change, and it was something I had to do by myself. I have followed my own course and personal feelings as you have suggested in your post. The worst advise I have ever received has been from professional advisors and the very worst was recently from Vanguard. Unfortunately most of my previous advisors tried to match my equity position with what hey felt would be my financial needs as I grew older without any consideration to my feelings. None of them recognized that I was able to continue working even at the age of 78, and thus my life expectancy was obviously shorter and the need for any funds for retirement would be substantially less. I may not need any of my retirement account but my wife will enjoy it. Not everyone is a fortunate as I am to have the option of working in old age, but it sure takes the guess work and worry out of the market. I have met without 5 financial advisors over the past 15 years, and I always wondered why I would listen to anyone with far less business experience than myself, and with no where near my assets. For those of us who have started with very little and have been blessed to receive some degree of financial success, you never forget where you started. The older I get the more I remember about the very beginning.
The interest rates on CD's are starting to look good again for folks.
Thanks for a great post as there is nothing better than common sense and your gut feeling.